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Using the economical order quantity formula for inventory control in one-warehouse multiretailer systems

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Abstract

In this article, we deal with the inventory control of one single product in a distribution network consisting of one warehouse and n retailers where the retailers face continuous demands with constant rates. We study two policies for this problem that are derived from the application of the classical economical ordering quantity formula at each location: the first policy is purely single-echelon, whereas the second synchronizes the reorder intervals between the different installations and thus constitutes a first step toward a multiechelon perspective. We show that those policies are, respectively, equation image - and 1.275-optimal. We then conduct computational experiments and demonstrate that our second policy exhibits excellent average performance and improves substantially over the pure single-echelon policy: in particular it deviates from Roundy's celebrated algorithm by less than 5%. This result indicates that in this simple setting, a great part of the benefit of shifting to a multiechelon perspective can be obtained by the most natural synchronization scheme between the different installations, and adapting single-echelon policies can be efficient at managing the inventory in simple distribution networks, confirming observations of practitioners. © 2012 Wiley Periodicals, Inc. Naval Research Logistics, 2012

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